Insider take: Why Russia will become the capital of cryptocurrency
Arsen Bakhshiyan explains how and why Russia is set to become the world crypto capital.
A few countries have emerged as cryptocurrency hot spots and have played an outsized role in the markets and crypto development to date. All of them share some common features, but the handful of real crypto powerhouses were also bolstered by specific circumstances.
The top three around the world by adoption might be South Korea, Venezuela and Russia. And across all three, cryptocurrency is widely seen as a different means to a different end.
In the case of South Korea, adoption was bolstered by a combination of a dense ultra-connected society, severe economic stress and bizarre political circumstances. Here, it's widely seen as an alternative investment that can potentially deliver the enormous returns needed to achieve financial success in an expensive and competitive country.
In Venezuela, wide and early adoption was spurred by a combination of cheap subsidised electricity and local economic collapse brought on partially by US sanctions. Here cryptocurrency is widely seen as a more convenient and reliable store of value than the destitute bolívar, despite its volatility. It became so commonplace that Venezuela was the first country to release its own national cryptocurrency, the Petro.
And in Russia and other parts of Eastern Europe, adoption may have been widely spurred on by a combination of a perfect crypto mining environment and situational investor sentiment, backed up by the encouragement of authorities and a lot of local talent, explains Arsen Bakhshiyan, CFO of Kvantor.
Bitfury, one the world's largest bitcoin mining companies, was founded in Georgia (the Eastern European one) and has also opened up operations in Iceland, Norway and Canada. All of these countries can offer the two essentials, cheap energy and cold weather, that any serious miner needs.
The need for cheap energy is pretty self-explanatory, while cold weather goes a long way towards offsetting the relentless cooling costs.
According to Bakhshiyan, Russia offers both, which makes crypto mining more tempting for the everyday citizen on the street and helps kickstart wide adoption.
"Russia has access to a vast amount of natural resources, which is evident in the volume of petroleum and natural gas it produces on an annual basis. At a home-grown level, this means that citizens are afforded with a relatively cheap supply of energy. As a result, mining rigs located in Russia are highly economical, especially when one considers the significant amount of electricity required to successfully mine a block," Bakhshiyan says. "Interestingly, the cold winter conditions also benefit miners, as less resources need to be spent on cooling fans to stop the equipment from overheating."
Beyond that though, Russia knows it's an attractive option and is willing to sweeten the deal further. This is done by offering a level of government support not found in the USA or China. Large-scale mining centres call for a lot of capital, so it's worth picking a location where you know the government won't suddenly ban cryptocurrency or mining. The level of official support can vary widely by region in the USA and is noticeably absent in China.
"Russian authorities are trying to tempt Bitcoin miners to re-locate from North America and China, with the enticement of cheap energy and a government that supports the cause," Bakhshiyan says.
This is part of Russia's broader crypto-centric political strategy. In addition to attracting foreign businesses, the Kremlin sees cryptocurrency as a viable way of undermining the dominance of the US dollar and encouraging a valuable homegrown cryptocurrency scene.
To paraphrase Russian author Dmitry Glukhovsky, "our empire was cancelled by a radio announcement."
He's referring to the abrupt dissolution of the Soviet Union in 1991, and the radio announcement which came out of the blue to tell citizens it was all over. At the time, he was talking about Russia's fondness for post-apocalyptic literature, speculating that it caught on because it was so relatable for anyone who remembered the sudden end of the USSR.
Decentralisation has caught on in a similar way. Thanks to their personal experiences, Russian traders can relate to the point of decentralised systems in a way that many others can't.
Most of the biggest crypto detractors, such as Bill "bitcoin kills people" Gates, Jamie "bitcoiners are stupid" Dimon and Warren "rat poison squared" Buffet (all Americans) can't relate to the value of decentralised currencies because nothing in their experience lets them. Naturally, they'd have a very different opinion if the Kremlin could easily impact the value of the US dollar and block them from overseas investments.
Wealthy Russian investors can't afford that kind of naiveté. Many of them vividly remember the USSR flipping from business-as-usual to nonexistence overnight and have clearly seen just how fragile governments and their currencies can be. One person might say bitcoin's worthless because it has no government backing. Another person says that's exactly what makes it so valuable.
At the same time, the value of the ruble and their available investment opportunities is being controlled by the whims of US foreign policy.
"Main-stream media publications in the West are dominated by Russia's tensions with its U.S. and EU counterparts," Bakhshiyan notes. "[Russia] makes regular appearances on the U.S. led trade sanctions list, preventing banking institutions from engaging in global financial markets. Even when sanctions are eventually lifted, retail investors are choosing to instead direct their funds towards blockchain assets, with the view that the decentralization of cryptocurrency trading is a more suitable alternative to the U.S. markets."
When money in Russia is fragile and money outside of Russia is at risk, the most sensible place to put money is everywhere and nowhere – that is, in decentralised systems.
This genuine usefulness has spurred trade and adoption in blockchain assets as more than just a speculative toy.
All dressed up and nowhere to go
These factors help drive practical cryptocurrency adoption at all levels. Individuals can see opportunities to make a few bucks mining (or hacking) from home and wealthy traders can see a safe haven in the digital space.
And businesses can see all the natural efficiency benefits of blockchain technology and more. Many have been forced to turn away once-valued customers, or have found themselves taking expensive new risks or performing additional compliance checks, but they can now cut costs and continue serving customers by simply snubbing US sanctions with cryptocurrency.
"With more than $150 trillion in cross-border transactions being processed annually, one would imagine that a globalized payments network exists. It doesn't. The closest thing in existence is SWIFT, who facilitate inter-bank communications for the majority of global payments," Bakhshiyan explains. The process is slow, expensive and highly regulatory. When Russian institutions need to trade internationally, they have no choice but to engage with the SWIFT platform. Domestic banks are starting to explore how blockchain technology could reduce Russia's reliance on a system that is directly influenced by American policy makers.
All these factors have also given rise to a lot of local talent, Bakhshiyan points out. But with strained relations putting a damper on people's urge to invest in Russian startups, the country might start increasingly developing its own separate blockchain ecosystem.
"There is often a 'Black Cloud' surrounding Russia's reputation, especially when one considers recent events such as the U.S. election hacking scandal and the poisoning of ex-spies living in foreign lands," he says. "This has led to an element of fear when forming new relationships with Russian innovators. However, this is often unjust, as one only has to look at some of the most ground-breaking FinTech developments of the past few years to see the prevalence of Russian talent. Major projects including Ethereum, Telegram, Revolut and Yandex are all led by Russians, suggesting that the country has a real appetite for technological innovation."
Elsewhere, Russian authorities are making deliberate efforts to dictate the development of global blockchain standards, but so is everyone else. Real progress might come from the inimitable cultural factors that help spur wider and quicker adoption.
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VEN, XLM, BTC and NANO.
- Ethereum price breaks all time high of US$1,448
- Ethereum price: Massive slide as market faces bearish pressure
- Ethereum 2.0: Roadmap, timeline and implications
- Bitcoin falls to US$34,000 as confidence in money markets improves with the Biden inauguration
- Bitcoin price lags while regulators raise fears and banks grapple